Why hotel real estate is king in Europe

Last year was jolly good for hotel real estate as an asset group in Europe. According to a recent joint HVS and Hodges Ward Elliott report, hotel real estate was the standout performer in Europe's property market in 2014, with transaction volumes growing faster than other asset classes, such as office, industrial or retail space.

According to the annual European Hotel Transactions report, published this week by HVS and its brokerage and investment services division HVS Hodges Ward Elliott, last year saw European hotel transaction volumes rise to a total of €4.4 billion, up 86 percent on 2013—a new record since the onset of the global financial crisis.

Renewed interest in the hotels market has been driven by the comparatively attractive income returns hotels offer and their potential for improvement through clustering, management reorganization or re-branding, the report stated.

The UK was Europe's most active hotel real estate market followed by Germany, then France. Together these three markets accounted for 59 percent of total European transactions during 2014.

"Demand for prime assets across Europe's key gateway cities is still very strong," said report co-author Jill Barthel, analyst, HVS London. "Prices in capital cities such as London and Paris are very high, prompting investors to increasingly consider secondary and tertiary investment locations, particularly in the UK."

The year also saw the highest level of single-asset hotel transaction volume on record, 72 percent higher than in 2013. Europe's highest volume of single-asset deals was in the UK, which recorded a total transaction volume of €2.5 billion, above France's €1.4 billion and Germany's €827 million.

Single asset deals in the UK were up 40 percent year-on-year with the country's strong economy and good hotel operating results driving investment in both London and the regions. Significant deals included the sale of the London Edition to ADIA and Strategic Hotels & Resort's sale of the Marriott Hotel Grosvenor Square for €151 million to Hong Kong-based Joint Treasure International.

Portfolio transaction volume across Europe grew faster than that of single asset deals. The year saw portfolio volume double year-on-year to €6.9 billion, 48 percent of total investment. This result was helped significantly by the largest deal of 2014, the Shanghai-based Jin Jiang's acquisition of the 90,000-room Louvre Hotels Group from Starwood Capital for €1.2 billion.

"The hotels sector has once again renewed its popularity and is becoming something of a favourite with investors. This has been prompted and supported by strong hotel performance in key cities and looks likely to continue as long as the economy across Europe continues to grow," said report co-author Adrian Ruch, analyst, HVS Hodges Ward Elliott. "We expect there will be further interest in the provincial markets from investors during 2015 as well as in key gateway cities such as Amsterdam and Barcelona."

Within the UK, expect Ireland to have a deluge of sales in 2015. According to the Irish Examiner, almost 25 percent of the 145 hotels put into receivership at the end of last year have yet to come to market creating "a pipeline of properties that will help transactions reach record highs again this year."

The large number of buyers, coupled with improving economic fortunes and a strong supply line of hotels, is likely to see transactions reaching peak-2014 levels when 68 hotels were sold, the story said.

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